GERASSIMOS D. ARSENIS’ INTERVIEW BERLIN 7 FEBRUARY 2010

In the wake of the economic crisis, different countries have indicated varying degrees of willingness to reform their economic systems, for instance the US and Britain are more enthusiastic than many European countries about breaking up bank operations to reduce their size from ‘too big to fail’. How can international consensus be reached on reforming the economic system while navigating internal political concerns?

It’s very difficult but we must. My belief is that we cannot have a stable international monetary system without collective action. Big countries like the Unites States can take national measures to deal with their banking system, to establish regulations, to break up big banks and to improve competition and so forth. But we have a global financial system that flows at an electronic speed – from Japan to the United States to England and so on. The banks are networking around the world and they’re not actually regulating things on a national basis. In all international relations, and we have been moving in that direction, but we have to examine several questions. First of all, what can we do on a global level? There’s no question that in the context of the IMF, we need to see how we’re going to settle the question of structural imbalances – in the balance of payments from key countries, like the United States and China. And then we can do a lot of things at the regional level. The European Union, and I insist on this, has proceeded in monetary union, which is incomplete. We do have a central bank in Europe but it’s not the lender of the last resort so when there are liquidity problems in some member countries, there’s no shift in liquidity from surplus and deficit countries so that you have a balanced growth within the region. And then weaker countries are exposed to international pressures and then the pressures will be on Europe and its monetary system. So we have to beat this. The other weakness is that you cannot have a monetary union without an accompanying common fiscal policy, which means that you have to have a large budget of the European Union. So there are a lot of things that can be done at the regional level and if we have better stability in the EU, then that will be a contribution to better global security.

UNCTAD advocates a proactive role of the state, not only in monitoring and regulations, but in supporting new industries and facilitating structural change in the economy. What are some of the challenges you believe that UNCTAD faces in achieving a fairer trading system?

The origins of this approach go way back in history. The idea is that the latecomers to international trade have a disadvantage because industries have been established in other countries and to create new industries in new countries is a very difficult thing. So what we did in UNCTAD about 40 years ago is a generalised preferential trading system where exports from developing countries were coming in with reduced tax, which gave special advantage and encouragement – first of all, for investment to take place in developing countries and to export industrial products from developing countries. I must say that over the period of time, things have changed, and industry did move from north to south. But this was not accompanied by a parallel movement of technologies – industrial production requires modern technologies and technologies have to move freely between countries. So I’m certainly for an open dynamic trading system but I feel that latecomer countries need special advantages at the initial stage of the game.

What role do you believe Greece should play in fomenting cooperation in the future in Cyprus? To what degree will both economics and cultural diplomacy play a role in finding a permanent solution to the problem?

First of all, lets not forget that Cyprus consists of a population which is about 80 per cent Greek, 18 per cent of Turkish origin and two per cent are of other minorities. So in my view, here you have a wonderful opportunity of developing a culture in Cyprus, which will enhance the cooperation of communities of primarily different religions, not so much different cultures. It is a pity really that Ireland is now divided and that Turkish troops occupy part of Cyprus, which hinders communication between the Greek Cypriots and the Turkish Cypriots. I think that we should let the two communities settle their issues without influence from the outside, in the context of the EU and on the basis of the principles of the EU. Which are these principles? They are the freedom to move within the country, to live and work where you want to, to have property in all parts of the island and of course to respect human rights and individual freedoms. If the communities are left without external influences, and that’s not just in the case of Greece and Turkey (the United Kingdom is heavily involved in this issue unfortunately) – there will be a solution. That will then be a good example of a democratic country.

President Papoulias said in November, that he could not support Turkey’s accession into the EU? What is your opinion on this? What economic benefits might Greece see in this? How can or should Turkey improve their diplomatic relations with Greece?

President Papoulias said that Turkey cannot become a full member of the European Union if it does not honour certain rules and regulations of the EU, and that’s obvious. For example, Turkey does not recognize the democracy of Cyprus as an independent state, which is a member of the EU. Now, Turkey does not allow ships from Cyprus to go to Turkish harbors and so forth. Mr Papoulias referred to the obligations that a candidate member has to remember that it has to actually honor (in terms of the rules and regulations of the EU). Otherwise, the Greeks and President Papoulias are supportive of a road to Europe of Turkey, but under those conditions.

Mr Papandreou recently spoke about how Turkey can improve their diplomat relations with Greece. There are certain outstanding issues, which must be discussed between the two countries but to my mind, the only problem, which is outstanding, is the issue of how far Turkish or Cypriot rights go in terms of resources at the bottom of the sea (continental shelf). Otherwise, we are saying that we are neighbouring countries and we have to deal with the international treaties, which were agreed upon and established years ago. We have to honour them and have good economic and cultural cooperation amongst us. What is actually happening, however, is that Turkey is disputing certain terms or the validity of the international treaties of the past, and this is the problem. These problems should be referred to the Hague quarters.

You were instrumental in the Joint Defence Force Dogma with Cyprus. What role did cultural diplomacy play in formulating this agreement?

That was a defence aspect alone, because at that time, and still today, there is the threat from Turkey. It was logical to me that we should coordinate our defence activities to create a defence structure that will refrain Turkey from taking any action that may lead to war. The cultural issue is another thing that must be developed but in order to do that you have to have peace conditions Between Greece and Turkey the conditions have not been fair so far and that’s a pity.

Greece has one of the highest debt ratios in the EU. Last year there were talks of Greece possibly defaulting on its long-term debt obligations. What reasons can you give that might account for this ongoing, seemingly entrenched economic problem? How does it bode for Greece’s future economic prosperity and role in the EU and as former Greek economic minister yourself, how have Greek governments failed to combat this problem for so long?

There is a lot of talk about the Greek debt and the Greek deficit but the true story is that there was a government failure last year. We had a government that was completely paralyzed and as a result taxes were not collected. Government expenditures increased and the deficit shot up to 12 per cent of the GDP. We had elections three months ago, the government was punished and we have a new government now, which at the very beginning made it clear that it will proceed with reforms and fiscal discipline to reduce the deficit. So this year the deficit will be reduced from 12.5 per cent to nearly eight per cent in one year. It will be further reduced next year and be brought down to below three per cent as is required in two and a half years time. And we’re dead serious about it. So it was a case of government failure in the past, and it is our responsibility now to restore this balance. But it’s not only Greece that has a big deficit – it is also Ireland, Portugal, Spain, Italy and France. So why did the international press pick on Greece? It seems to me that the speculators invested a lot of money betting on the devaluation of the euro and they thought Greece was the weak link so they started spreading rumours around that Greece would default. But there’s no possibility of any country defaulting – it’s simply a question of properly managing your own house and this is what we do. We do have the required finance – we can borrow from the markets and we can borrow from outside of Europe as well. I think that as the markets realise that we mean business and that we’re going to reduce this deficit, the speculation pressure will leave us and go to other countries. And that will be the moment when the European Union will have to realise that you should not leave national governments alone to face these speculative pressures. We should act collectively and complete our monetary union through institutions of lenders of last resort. If we can borrow internally in Europe, we become independent of global markets and we can coordinate among ourselves.